As we know, the President has signed what was originally titled Tax Cuts and Jobs Act, the most significant overhaul to the U.S. Tax Code since 1986. The President signed the Act into law after the first of the year in order to avoid some automatic spending cuts.

In its final form, this Tax Code overhaul retains private activity bonds and the the low-income housing tax credit. However, according to A Call To Invest in Our Neighborhoods (ACTION) Campaign, the amendment of other critical provisions of the Tax Code, especially, the lowering of the corporate tax rate from 35 percent to 21 percent and the creation of a base erosion and anti-abuse tax, present concern for affordable housing, as these provisions can impact an investor’s tax credit appetite. In an analysis performed by Novogradac and Company, the final version of the bill “would reduce the future supply of affordable rental housing by nearly 235,000 homes over 10 years.” Further, it is anticipated that other changes to the Tax Code, such as those relating to bonus depreciation, depreciation, and interest expense limitations, will impact equity pricing.

The legislation also retains the new market tax credit, with no change to its expiration which is after the 2019 allocation. The 20% historic tax credit was also retained, but with significant modification, including claiming the credit ratably over 5 years.

Ballard Spahr’s Tax Group is also following the legislative developments of other provisions of the bill. Late yesterday, the Tax Group issued a thoughtful analysis of the final bill.

Please use our Tax Reform Alert Center as a resource to find more information on the bill and/or reach out to us directly.

 

 

Last week at the annual meeting of the American Bar Association Forum on Affordable Housing and Community Development (Forum), Michael Novey, Associate Tax Legislative Counsel, Office of Tax Policy, U.S. Department of the Treasury, encouraged the Tax Credit Equity and Financing Committee of the Forum to consider submitting a request to the IRS for priority guidance on issues relating to the low-income housing tax credit (LIHTC). Based on discussions at the annual meeting, the Committee submitted its top five issues today, which can be found here.  Not only does the request provide background on the issues, it also describes why it is important for guidance to be provided now.

Each year the public is invited to submit recommendations to the IRS about what guidance would be helpful for the IRS to provide. This year’s notice from the IRS can be found here.  In past guidance plans, various LIHTC topics have been included, such as the right of first refusal under tax code Section 42(i)(7) and the federally or state assisted exception to the 10-year acquisition credit rule under tax code Section 42(d)(6).  Since the IRS has not yet provided formal guidance on these two important topics, they are among the issues included in the Committee’s request.

We will keep you posted if/when the IRS responds to these issues.

 

Last week, the IRS released a long-anticipated update to its Audit Technique Guide for the low-income housing tax credit (“LIHTC”) program. The guide is intended to assist IRS examiners charged with auditing owners of LIHTC properties, and is the first official update published since 1999. A draft of the updated guide was made available for public comment from December 2013 through March 2014. The IRS’s notes accompanying the update indicate that 19 groups and individuals provided comments, in addition to comments provided by various IRS personnel.

Among other changes, the updated audit guide:

  • expands the definition of “Residential Rental Property” in accordance with Notice 88-91;
  • clarifies that a deferred developer fee may be documented by a note or “other applicable documents evidencing the debt”;
  • adds new section entitled “Emergency Housing Relief”; and
  • expands discussion of “Casualty Losses in Federally Declared Disaster Areas” to include a reference to Revenue Procedure 2014-49.

Yesterday, the IRS issued Revenue Procedure 2014-52 which provides for the reallocation of $2.59 million of unused national pool low-income housing tax credits (LIHTCs).  The national pool credits were divided among thirty-five states and Puerto Rico, with California receiving the largest allocation of $364,756. Each year the Internal Revenue Service allocates a certain amount of LIHTCs to each state using a formula allocation method, which is based on a state’s population, and is established in Section 42 of the Internal Revenue Service Code.  In addition to the credits allocated pursuant to this formula method, each year, states are also permitted to allocate LIHTCs that were returned (unused) to the state housing finance agency (HFA) by recipients of tax credits allocated in a prior year, and LIHTCs from the prior calendar year that were not previously allocated by the HFA.  However, tax credits that are not allocated by a state HFA within 2 years must be returned by the state HFA to the IRS, which then places them in a national pool of unused tax credits.  The IRS then reallocates these national pool credits to state HFAs that fully utilized their entire LIHTC allocation for the prior calendar year.

DominoesFor many years multifamily housing apartment projects could be financed with tax-exempt drawn-down bonds and loans with all of the bonds issued pursuant to a draw-down loan being treated as part of a single issue.  The date of issuance for the bonds would be the first date on which the aggregate draws exceeded the lesser of $50,000 or 5 percent of the issue price of the bonds.  Draw-down bond structures were used in many private placements as a means to eliminate negative arbitrage.

Faced with the possibility that a governmental issuer could use a draw-down structure for a Build America Bond (BABs) issue and avoid the statutory deadline for issuance of BABs, the Internal Review Service issued Notice 2010-81 creating separate definitions for (i) the issue date of a bond and (ii) the issue date of an issue of bonds. The issue date of a bond was determined to be the date that the issuer received funds in exchange for the bonds and the issue date of an issue of bonds was determined to be the first date on which the aggregate draws exceeded the lesser of $50,000 or 5 percent of the issue price of the bonds.

After the release of Notice 2010-81, the Internal Revenue received comments that the definition of the issue date of a bond in Notice 2010-81 created concerns for the treatment of draw-down bonds for purposes of the allocation and administration of volume cap on private activity bonds.  Finally, in 2011 the Internal Revenue Service issued Notice 2011-63 and indicated that, solely for purposes of private activity bond volume cap under Section 146 of the Internal Revenue Code, an issuer may treat a bond as issued either (i) on the issue date of the bonds under the general rule of Notice 2010-81, or (ii) on the issue date of the issue, provided that all of the bonds of the issue are delivered no later than the earlier of (a) the statutory deadline of issuing the bonds, or (b) the end of the maximum carryforward period of unused volume cap under the applicable statute treating all of the unused volume cap for the issue as volume cap arising in the year in which the issue date of the issue occurs. Notice 2011-63 also indicates that an issuer must type special language on the IRS form 8030 filed with respect to the bonds. 

Although Notice 2010-81 gives guidance as to which definition to use for purposes of the administration of volume cap, several questions remain.  For example, which definition of issue date should be used in applying the public hearing rules and should all draw-down bonds be treated as a single issue for purposes of applying use of proceeds rules such as limits for land and bad costs.

ConstructionRestructuring tax-exempt obligations

Recently I have assisted several clients restructure the tax-exempt obligations originally issued to finance their affordable housing projects. The purpose of these restructurings has been for anything from reducing the monthly principal and interest payments on the obligation, to converting some of the obligations to a subordinate lien position, to simply making a clarification in the documents about the obligation terms.

Reissuance of tax-exempt obligations

Changes to tax-exempt obligations may cause a reissuance of the obligations under federal tax law if the changes are so significant that the obligations cease to be the same obligations for tax purposes. You might ask why does a reissuance matter? Or, what happens if my tax-exempt obligations have been modified so as to trigger a reissuance? Answers to these questions and a basic discussion of reissuance may be found at the Internal Revenue Service website. Because the reissuance rules and regulations are complicated, the IRS recommends you contact your counsel before making modifications to tax-exempt obligations.